Biden takes big step toward government-backed digital currency

A US digital currency could be on the horizon.

The Biden administration is supporting the research and development of a “US central bank digital currency,” or CBDC.

The move is part of a broad executive order signed by President Joe Biden on Wednesday asking the federal government to explore possible uses and regulation of digital assets such as cryptocurrencies.

“My administration places the utmost urgency on research and development efforts into potential options for designing and deploying a CBDC in the United States,” the executive order reads.

The order directs a wide variety of agencies to begin research and submit reports on a variety of digital currency issues, from design and security to financial and societal impacts.

“We know that the implications of the potential issuance of a digital dollar are profound. They are extremely varied,” a senior administration official told reporters on a call Tuesday.

While a US digital currency wouldn’t necessarily change much in terms of everyday experiences like buying goods and services, economists say it could transform central and commercial banks, as well as government sanctions, banking accessibility and taxes.

“The potential here is huge, and it’s very exciting,” said David Yermack, professor and chair of New York University’s finance department.

The executive order will call on the government to investigate the technical needs of a digital currency and advocate for the Federal Reserve to continue its research and development, according to a fact sheet released by the White House.

The Fed released a white paper in January on the potential creation of a CBDC that would complement existing payment systems. He found that a CBDC could make payments cheaper and easier for consumers, but could also pose a risk to the stability of the US financial system.

In its fact sheet, the administration said it would also take steps to “mitigate the illicit finance and national security risks posed by the illicit use of digital assets by directing unprecedented coordinated action among all relevant U.S. government agencies to mitigate these risks.”

The United States would not be the first country to have a digital currency. China has introduced its own CBDC, with over 140 million people having opened digital “wallets” and many other countries have deployed or are developing digital currencies. The Bahamian Sand Dollar is considered one of the most successful digital currencies in the world.

Yermack said the Biden administration’s move signals what he sees as some inevitability of a broader move toward digital currencies.

“It’s not a question of if but when,” he said. “Once central banks start co-opting technology, that’s pretty much game over.”

Although the administration’s fact sheet didn’t provide any details on how a U.S. digital currency works, Yermack suggested the functionality could be reasonably simple, with transactions flowing directly to and from the Fed, bypassing banks. and payment systems and creating almost transparent flows. cash.

It’s a simple concept with the potential for far-reaching ramifications. Yermack said a widely adopted digital currency would pose existential questions for banks and many other financial services focused on facilitating payments.

“Bill Gates said there will always be banks but there won’t always be banks,” Yermack said.

Digital currencies also open up new possibilities for how government exercises policy, said Michael Bordo, professor of economics and director of the Center for Monetary and Financial History at Rutgers University in New Jersey.

A digital currency could make the type of coronavirus pandemic stimulus payments almost instantaneous and much more efficient, he said, perhaps even reaching people who have previously been excluded from banking services.

Bordo cited the Bahamas digital currency as an example of how the unbanked can benefit.

“They found it really worked, and they found ways to make it really simple, because there are a lot of very low-income people who don’t have bank accounts,” Bordo said.

In addition to consumer benefits, a US digital currency would give the Fed a new tool that economists have so far only theorized about: negative interest rates.

Interest rate controls are the Fed’s main means of stimulating or cooling the economy, but it has its limits. Banks can only lower interest rates on regular money to such a low level, known as the zero band, leaving central banks with few options when interest rates are already low and the economy needs a boost.

With a digital currency, the zero limit does not exist, allowing for aggressive action when needed.

“If the money is electronic, the government can just erase 2% of your money every year,” Yermack said. “I think it’s going to become a necessity just because of the changing demographics around the world.”

Bordo also highlighted negative rates as an important feature of digital currencies.

“I think this is something that could be a game-changer for the Fed,” he said.

Despite all the theoretical possibilities, a US digital currency faces many real obstacles. Bordo noted that commercial banks have a vested interest in opposing the technology.

“Putting this project through is going to be a big project,” he said.

Yet a broader momentum for government-backed digital currencies is building. Yermack said he advised major governments to create their own currency and that as more countries adopt theirs, “the others are probably going to follow suit pretty quickly.”

“Two years ago everyone was ridiculing that,” Yermack said. “Now that’s the hot thing to do.”

About Ruben V. Albin

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